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SERVICE TAX NOW PAYABLE ON DUE INVOICE PAYMENT BASIS

It is a pertinent question in the context of taxation of services as to when a service is said to be provided so that it becomes taxable at that point of time. A service provider may consider a particular service being provided at a particular point of time whereas the revenue may have different opinion leading to conflict of opinion. Currently the service tax is required to be paid as and when the payment for the service is received. It includes taxation on advance payment also though the service for which advance is received is yet to be provided. However, this provision may seem to be simple and straight forward, but still under certain situations there is lack of clarity and certainty in the matter of levy and collection of service tax. Further, the provision of taxing a service on receipt basis is at odds with regime in force in Central Excise and VAT laws implemented by the states. With a view to bring more clarity as to the point of time when a service need to be taxed, draft point of taxation rules were earlier circulated for public comments. Now, a step has been put forward on the auspicious occasion of budget session to notify Point of Taxation Rules, 2011 through issuing Notification No. 18/2011-ST, dated 1-3-2011. It is provided that these Rules shall be effective from 1-4-2011 and therefore, nothing contained in the present rules shall be applicable in case of invoices issued prior to 1-4-2011.

Meaning of Point of Taxation

Point of taxation means the point in time when a service shall be deemed to have been provided. Rule 3 enumerates the manner in which the ‘point of taxation’ shall be determined. The basic mandate is that a provision of service shall be treated as having taken place at the time when service is provided. However, since the words ‘to be provided’ have also been used, the taxable event shall be pre-poned in case of future provision of service. In other words, a taxable service, even though promised to be provided at a future date, shall also be taxable before its actual execution.

The above provision as to the ‘point of taxation’ will get amended where the service provider issues an invoice or receives any payment before providing service; and in such a case the service, to the extent of the amount mentioned in the invoice, or the amount of payment, shall be deemed to have been provided. This provision makes the service provider liable to pay the service tax calculated according to the amount mentioned in invoice, or the payment received, even if the service has not been provided at that point of time.

An analysis of Rule 3 leads to the general rule that the time of provision of service will be the earliest of the following dates:

(i) date on which service is provided (or to be provided)

(ii) date of invoice

(iii) date of payment received

For the purpose of section 66A which makes provision for charge of service tax if services are imported and resorts to ‘reverse charge’ method by which service receiver in India becomes liable to pay service tax for the service so imported, the point of taxation shall be the date on which the invoice is received, or the payment is made, as the case may be, whichever is earlier.

Change of Rate of Tax and Point of Taxation

Rule 4 considers the determination of ‘point of taxation’ when there is a change of rate of service tax in respect of a service. The following situations have been perceived under this rule:

(i) Where taxable service has been provided before the change of rate:

In such a situation the ‘point of taxation’ shall depend upon the issue of invoice and receipt of payment. In case where the invoice for the provision of service has been issued and the payment received after the change of rate, the point of taxation shall be the earliest date of payment or issuing of invoice. In case where the invoice for the provision of service has been issued prior to change in tax rate but the payment is received after the change of rate, the point of taxation shall be the date of issuing of invoice. In case where the payment for the provision of service is received before the change of rate, but the invoice for the same has been issued after the change of rate, the point of taxation shall be the date of payment.

(ii) Where a taxable service has been provided after the change of rate:

As in the (i) above, in such a situation also, the ‘point of taxation’ shall depend upon the issue of invoice and receipt of payment. Thus, where the payment for the invoice issued in respect of provision of service, is also made after the change in tax rate but the invoice has been issued prior to the change of tax rate, the point of taxation shall be the date of payment. In case where the invoice has been issued and the payment for the invoice received before the change of tax rate, the point of taxation shall be earliest of the date of receipt of payment or the date of issuance of invoice. In case where the invoice has also been raised after the change of rate but the payment has been received before the change of rate, the point of taxation shall be date of issuing of invoice.

Thus, Rule 4 prescribes the applicable rate of tax in the cases where the tax rate changes between the occurrence of different events, viz., provision of service, issuance of invoice, and receipt of payment. The provisions explained above can be tabulated as shown below:

. No.

Provision of service

Issue of invoice

Receipt of payment

Point of taxation

1.

Before the change of rate

After the change of rate

After the change of rate

Date of invoice or payment, whichever is earlier

2.

Before the change of rate

Before the change of rate

After the change of rate

Date of invoice

3.

Before the change of rate

After the change of rate

Before the change of rate

Date of payment

4.

After the change of rate

Before the change of rate

After the change of rate

Date of payment

5.

After the change of rate

Before the change of rate

Before the change of rate

Date of invoice or payment, whichever is earlier

6.

After the change of rate

After the change of rate

Before the change of rate

Date of invoice

Continuous Supply of Service and Point of Taxation

“Continuous supply of service” means any service which is provided, or to be provided continuously, under a contract, for a period exceeding three months. Further, “continuous supply of service” will also include a situation where the Central Government, by notification prescribes provision of a particular service to be a continuous supply of service.

Rule 6 prescribes that in case of continuous supply of service, the whole or part of which is determined or payable periodically or from time to time, shall be treated as separately provided at the date on which the payment is liable to be made by the service receiver, if such date is specified in the contract. Thus, the rate of tax will be the rate applicable on the date the payment becomes due as per the contract.

If, before the time specified for payment as above, the service provider issues an invoice or receives a payment, the service shall, to the extent covered by the invoice or the payment made thereof, be deemed to have been provided at the earliest of the time the invoice was issued or the payment was received.

In case of advance payment, the point of taxation shall be the date of receipt of such advance.

For the purpose of section 66A which prescribes resorting to ‘reverse charge’ method by which service receiver in India becomes liable to pay service tax for the imported services, the point of taxation shall be the date on which the invoice is received, or the payment is made, as the case may be, whichever is earlier.

Associated Enterprises and Point of Taxation

Rule 7 describes the determination of point of taxation in case of associated enterprises (as defined in section 92A of the Income-tax Act). The point of taxation in such a case shall be earliest of the following:

(i) the date on which the payment has been made, or

(ii) the date on which invoice under rule 4A of the ST Rules, 1994 has been issued, or

(iii) the date of debit or credit in books of accounts of the person liable to pay service tax

Payment of royalties etc. and Point of Taxation

Rule 8 prescribes the determination of point of taxation in respect of royalties and payments pertaining to copyrights, trademarks, designs or patents.

Thus, where the whole amount of the consideration for the provision of service is not ascertainable at the time when service was performed, and subsequently the use or the benefit of these services by a person other than the provider gives rise to any payment of consideration, the service shall be treated as having been provided each time at the earliest of the following:

(i) when a payment in respect of such use or the benefit is received by the provider in respect thereof, or

(ii) an invoice is issued by the provider.

New Services

Rule 5 describes payment of service tax in case of new services not falling under the category of continuous supply of service.

In case invoice has been issued and the payment received against such invoice before such service became taxable, no tax shall be payable to the extent of amount so received, though service was rendered after it became taxable. This provision ensures that a financial transaction which has achieved finality before a service became taxable shall not be reopened for recovery of tax.

Further, no tax shall be payable if the payment has been received before the service becomes taxable and the invoice has been issued within the period referred to in rule 4A of the Service Tax Rules, 1994 i.e. within 14 days.

Consequential changes in ST Rules, 1994

Consequential changes, emanating from the promulgation of ‘Point of Taxation Rules’ have also been made in the Service Tax Rules, 1994 to alter the payment of service tax from receipt of payment to provision of service and also to permit adjustment of tax when service is not finally provided.

Conclusion

Point of Taxation Rules, 2011 broadly following the lines of best international practices and paving way for the GST regime, have been framed for the purpose of determining the point in time when the services shall be deemed to be provided for the purpose of charging of service tax on taxable services. Keeping in view the different situations, like a situation where the rate of tax is changed or a situation where associated enterprise is involved or a situation where there is continuous supply of service or a situation where a new service becomes taxable for the first time, the provisions have been made by framing rules for determination of point of taxation. The major change proposed to be brought about through these rules is to link the payment of tax to the provision of service, raising of the invoice or payment for service provided or to be provided, whichever is the earliest. Thus a departure has been made from the current provision where the payment of service tax is linked to receipt of payment for the service. Though manipulations are still possible but on a whole, it is hoped that both the tax payers as well as the tax officials would not face any uncertainty regarding charging of service tax under different situations.